Sri Lanka Reaches IMF Staff-Level Agreement on Seventh IMF Review

COLOMBO, Sri Lanka — Sri Lanka has reached a staff-level agreement with the International Monetary Fund (IMF) on the seventh review of its four-year economic reform program, potentially unlocking about US$345 million in additional financing once the agreement is approved by the IMF Executive Board.

The agreement follows discussions between IMF staff and Sri Lankan authorities and also concludes the IMF’s 2026 Article IV Consultation with Sri Lanka.

The disbursement, equivalent to SDR 254 million, would bring total IMF financing provided under Sri Lanka’s current Extended Fund Facility (EFF) program to approximately US$2.7 billion.

The IMF Executive Board’s approval is still required. Before that can happen, Sri Lanka must meet two conditions: the Finance Minister must present the 2027 national budget to Parliament in line with the IMF program’s parameters, and the IMF must complete a financing assurances review covering international partners’ financial contributions and progress on Sri Lanka’s debt restructuring.

Economy shows resilience

The IMF said Sri Lanka’s economy has remained resilient despite a series of external and domestic shocks following the country’s severe economic crisis.

Economic activity grew by 4.2% year-on-year in the second quarter of 2026, marking the 11th consecutive quarter of strong economic growth, according to the IMF.

Headline inflation stood at 8% in September, remaining in single digits, while gross official reserves reached US$6.9 billion at the end of August.

The IMF also said Sri Lanka’s banking sector remains well-capitalized and profitable, while fiscal performance during the first half of 2026 was strong. The country’s debt restructuring process is also described as largely completed.

Sri Lanka entered the IMF program after its unprecedented economic crisis in 2022, when the country defaulted on its foreign debt and faced severe shortages of fuel, food and essential medicines.

The IMF Executive Board approved the current four-year EFF arrangement in March 2023 for a total of SDR 2.3 billion, equivalent to about US$3 billion.

Middle East war poses new risks

Despite the improving economic indicators, the IMF warned that risks to Sri Lanka’s recovery remain tilted to the downside.

The Fund highlighted uncertainty surrounding the duration and intensity of the war in the Middle East, global trade policy and the potential effects of El Niño.

The IMF said a prolonged conflict in the Middle East could affect Sri Lanka through higher energy prices and other external shocks.

It called on the government to allow domestic fuel prices to adjust in line with international prices and maintain cost-recovery energy pricing, while protecting vulnerable households through targeted support.

The IMF emphasized that any assistance should be targeted, budgeted, carefully costed and time-bound to avoid undermining fiscal and debt sustainability.

It also urged Sri Lanka to strengthen poverty-targeted cash transfers and improve the coverage and responsiveness of its social safety-net programs.

IMF calls for continued reforms

The Fund stressed that Sri Lanka needs to maintain the reform momentum achieved under the IMF program rather than ease up on reforms as the economy recovers.

Among the priorities identified by the IMF are:

• Developing a medium-term revenue strategy to strengthen government finances and improve the fairness and efficiency of the tax system.
• Improving public investment management and speeding up infrastructure spending.
• Maintaining greater exchange-rate flexibility to help the economy absorb external shocks and build foreign-exchange reserves.
• Preserving the country’s anti-corruption legal framework.
• Liberalizing trade and modernizing business and labour regulations.
• Expanding access to finance.
• Advancing digital public infrastructure.
• Addressing infrastructure gaps that constrain economic growth.

The IMF said these reforms are essential to transform Sri Lanka’s current stabilization into sustainable and inclusive economic growth.

The IMF team visited Sri Lanka from September 10 to 23, 2026, before holding further virtual discussions with Central Bank Governor Dr. P. Nandalal Weerasinghe, Treasury Secretary Dr. Harshana Suriyapperuma, Senior Economic Advisor to the President Duminda Hulangamuwa and other senior officials.

The seventh review will now move toward the IMF Executive Board, with the proposed US$345 million disbursement dependent on completion of the remaining conditions.